A growing concern in recent years over the manner in which resources are allocated in the public sector has led to the introduction of private market type incentives in order to better attain social goals. These policies are a particularly important development for mental health care, since a very large proportion of mental health services are publicly provided or financed, and since the mental health care delivery system is facing key resource allocation problems. Specifically, these are the lack of access to community based care for the severely mentally ill, and the problem of "dollars not following patients." The goal of this research is to study two dimensions of the provision of publicly financed services for the mentally ill. The first dimension concerns the mechanisms used to finance community based care. This involves a focus on the financial incentives present in state and local intergovernmental transfers, since typically such care is financed by the state and provided by the local government. The second dimension involves the choice of local government to provide community mental health services themselves of to pursue privatization. The extent, and nature of, intergovernmental transfers and privatization will be determined and described. The consequences of financial incentives in intergovernmental transfers for delivery of mental health services will be analyzed, as will the determinants of a local government's decision on whether to privatize.